Drafting A China Manufacturing Agreement. Watching The Sausage Get Made.

I love it when a blog post just lands in my lap, and one just did. It is a couple of emails from two of my firm’s lawyers to two different clients, both of whom recently retained us to draft OEM Agreements for production of product by factories in China. Both clients are in the process of changing their Chinese manufacturers and this time around they want a strong and enforceable supplier agreement with their new Chinese manufacturer.

I am doing this post to give an idea of some of what should go into a Chinese manufacturing agreement.

Since we have a fairly standard initial questionnaire we send to our clients when we being working on China OEM manufacturing agreements, I have combined the two emails into one, further camouflaging the companies involved. Here are the questions posed by the emails:

What is the name and contact information of the Chinese manufacturer?

What sort of products will the Chinese manufacturer be making? Do you anticipate that these products will change over time? Will the volume change over time?

Where do you anticipate selling your products In particular, will you be selling it in China?

What are you expecting regarding shipping terms?

Will you be using this OEM agreement only with this specific Chinese manufacturer, or will you be wanting to re-use it with others?

What arrangements will be made for packaging prior to shipment?

Are you concerned about your manufacturer going around you by directly selling a competing product your customers?

Exactly what will you want to be done with any defective product?

Do you have an existing purchase order (PO) that you intend to use for your product orders from this manufacturer? If so, please provide us with a copy.

How are you anticipating pricing and other terms will be negotiated? On a purchase order basis? On an annual basis? Some other way? If you submit a purchase order and is not accepted by the Chinese side, what happens? In other words, is the Chinese side bound for some period to make a certain amount of product at a certain price, or is the Chinese side only obligated to make product for you after it accepts your purchase order?

How many of the deal terms have been negotiated at this point? From the documents you have sent us, it appears that only the very basics have been negotiated: 40% down, 60% before delivery/shipping, plus certain quantity discounts. These are not great terms from your standpoint, but fairly typical for deals with manufacturers in Southern China (i.e., Shenzhen, Guangdong, etc.).

What sort of arrangements have you made for inspection and quality control, and what sort of warranty terms have you negotiated? This question is particularly important in that many manufacturers in the south of China insist on a no-warranty provision.

What are your main concerns in this deal? I ask this both so I can focus on the provisions that matter to you, and because it can help determine the choice of law and the choice of venue. From what I know so far, your main concerns seem to be twofold: (1) getting a high quality product and (2) protecting your intellectual property (i.e., ensuring that the Chinese manufacturer does not sell your product behind your back and/or steal your tooling).

What exactly is the tooling for this product? Does the Chinese manufacturer already have all of the tooling in question?

Has the Chinese manufacturer already signed an sort of agreement/memorandum of understanding (MOU) with you, even if only in English?

Are there any unresolved issues involving your previous manufacturer ? For instance: have you gotten all of the tooling back from the previous factory? Are there any outstanding invoices or payments due?

After we get answers to the above questions, we virtually always write back with a whole slew of follow-ups.

For more on what it takes to have/create a good OEM Agreement, please check out the following:

Dan Harris is internationally regarded as a leading authority on legal matters related to doing business in China and in other emerging economies in Asia. Forbes Magazine, Business Week, Fortune Magazine, BBC News, The Wall Street Journal, The Washington Post, The Economist, CNBC, The New York Times, and many other major media players, have looked to him for his perspective on international law issues.

I am a bit dumbfounded by the comment left by Allen. Especially as I didn’t see the original post refer to the clients being US. But even if they were, I don’t really see the connection.
Dan, besides the above questions – have you noticed any trends or particular problems your clients have faced. E.g. if they do plan on changing volumes in the future (up or down), will this impact the OEM agreement.
Cheers

Can I ask about the wording of your agreements in Chinese? A deal I’m involved with has been running into a lot of trouble because the American law firm who wrote our contracts have written them in highly complex legalese, very different to the language of Chinese law and standard Chinese contracts. In the third tier city where we are trying to operate, our partner and potential collaborators are having real trouble just reading and understanding the documents. (I’m a translator, and I’m reasonably sure that both sides are right on this – the contracts are correct, but they really are very difficult to read.)
How does your firm walk the line between the conventions of English (American) legal drafting and Chinese drafting?

Ruby Claire

We used to take our English language contracts and pay a good translator to translate them into Chinese. I say “used to” because we did that once on a fairly high level deal on which the Chinese side hired its own attorneys and when we showed them the contract they pretty much laughed their heads off in Chinese without realizing that we understood what they were saying. From then on, we started to actually focus on doing a real Chinese version, separate and apart from what the English language version we do for ourselves.

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